China steps up inflation fight with bank reserves hike

Nikhil Kumar
Monday 18 April 2011 00:00
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China stepped up moves to head off inflation yesterday by raising bank reserve requirements for the fourth time this year.

The move, which comes after an increase in benchmark interest rates at the start of April, is the seventh since Chinese monetary authorities began tightening policy in October.

The 50-basis point rise will come into force on Thursday, and takes the required reserve ratio for China's biggest banks to 20.5 per cent.

It follows figures showing the Chinese economy expanded by 9.7 per cent in the first three months of the year, while consumer inflation soared to a 32-month high of 5.4 per cent in March, from 4.9 per cent in the first two months of the year.

The jump in consumer prices was the fastest since July 2008, and above forecasts of a rise to 5.2 per cent. The pace of economic growth was down from the 9.8 per cent expansion seen in the final three months of 2010 but ahead of forecasts of 9.5 per cent.

"This rise continues the tightening measures of the central bank. The first quarter GDP shows that the whole economy is good, so there is still space for tightening," Lin Songli, an economist with Bejing's Guosen Securities said.

Zhu Jianfang, chief economist at Citic Securities in Bejing, said further monetary tightening remained on the agenda, though interest rate rises might not be forthcoming this month. "I think there will be more required reserves hikes in the coming months, or even this month, but the possibility of an interest rate rise this month is not that big," he explained.

China's efforts to tackle rising prices come against the backdrop of growing international concern about rising inflation in emerging markets. On Saturday, the Singaporean finance minister, Tharman Shanmugaratnam, who chairs the International Monetary Fund's steering committee, said rising prices in emerging markets mattered to both local and international policymakers.

"When inflation goes up in emerging markets, it's not just an emerging market problem, it's a global inflation and possibly interest rate problem," he said, warning that, if left unchecked, the price rises could spread to richer economies and threaten their path out of the recent slump.

"We have learned from painful experience in the past few years that nothing is isolated and that risk in one region rapidly gets transmitted to the rest of the world," he explained.

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